7 Undertakings for collective investment
in transferable securities (UCITS) depositaries
| (25526)
8157/04
COM(04) 207
| Commission Communication on the regulation of UCITS depositaries in Member States: review and possible developments
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| Legal base | — |
| Document originated | 30 March 2004
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| Deposited in Parliament | 7 April 2004
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| Department | HM Treasury |
| Basis of consideration | EM of 18 June 2004
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| Previous Committee Report | None
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| To be discussed in Council | None planned
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
7.1 Undertakings for collective investment in transferable securities
(UCITS) are investment funds constituted in a Member State which,
when complying with the UCITS Directives,[23]
may be promoted in other Member States. They give retail investors
the benefits of risk diversification and expertise in investment
management at a reasonable cost by pooling investors' savings.
A UCITS depositary is entrusted with safekeeping the assets of
UCITS funds and performing a series of controls for the protection
of investors.
7.2 The legal framework in the UCITS Directives focuses
mainly on the fund itself (the UCITS) and the manager. Depositaries
are subject only to a limited number of principles and duties
within this framework. The legal nature, internal control and
organisation of depositaries are left to Member States to regulate.
But the Directives stipulate that:
- UCITS may be authorised only
if the competent authorities approve the choice of depositary
with directors of sufficiently good repute and experience;
- the depositary must furnish sufficient financial
and professional guarantees; and
- the depositary must be subject to public control.
7.3 In general, depositaries do not benefit from
a passport allowing them to provide services in other Member States.
Rather, they must be established in the same Member State as
the fund manager.
7.4 Current Community legislation is unclear as to
the prudential duties of depositaries. It does incorporate principles
of separation and ethical independence between the fund manager
and depositary, but the technical safeguards are very limited.
7.5 When the Council adopted the two amending UCITS
Directives it asked the Commission to report on "the regulation
of depositaries according to Directive 85/611/EEC and the need
for amending the regulation, accompanied, where appropriate, by
proposals for a revision", particularly mentioning the relationship
between the fund manager and the depositary. The Commission's
review is expected to be concluded in mid-February 2005.
The document
7.6 The Commission's Communication is concerned with
meeting the Council's request in relation to depositaries. It
draws on a public consultation begun in September 2002. The Communication:
- reviews the regulations in
force in Member States;
- identifies prudential issues in relation to consolidation
of the single market; and
- proposes remedies for problems identified.
7.7 The document identifies four areas for additional
harmonisation in order to:
- prevent conflicts of interest
more effectively (convergence of prudential frameworks);
- clarify the extent of the depositary's liability;
- promote convergence of establishment and operating
conditions and in particular capital requirements;
and
- enhance transparency standards and investor information.
7.8 The Commission says it intends to study these
matters further and that the results will feed into the overall
UCITS report due in 2005.
The Government's view
7.9 The Financial Secretary to the Treasury (Ruth
Kelly) says:
"The Government is committed to a functioning
single market in asset management and to removing the barriers
that currently exist to facilitate this. However, it is disappointing
that the Communication doesn't make express reference to the types
of business models for the provision of cross-border depositary
services.
"A full analysis of the business models currently
in use in the sector, those likely to be used in the future coupled
with the barriers to a single market in asset management would
give a more complete picture of the existing state of integration.
"The Commission (DG Internal Market) has established
an expert group to consider strategy on asset management more
generally, post the Financial Services Action Plan (FSAP). The
group consisted of experts across the EU from industry and trade
associations. It is expected that the Group will report back
to a public conference on the 22-23 June. The Commission should
be informed in its actions on depositaries by the outcome of the
expert group it has established.
"This Communication is very light in detailed
analysis. The Government would not accept this as the basis of
any future proposal and would demand a full cost benefit analysis
to be done in close consultation with Member States, the industry
and consumer groups."
7.10 In relation to promotion of convergence of prudential
frameworks the Minister says:
"The Government considers this priority misplaced.
For a single market in asset management to work, the depositary
must benefit from passporting arrangements to facilitate their
operation in other Member States according to home state rules.
Without such a passport, the depositary would face different
sets of rules in each Member State which would act as a prohibitive
barrier to entry. There should be explicit provision of the passport
if any future harmonisation is to be proposed."
7.11 On the questions of clarification of the extent
of the depositary's liability, convergence of establishment and
operating conditions, in particular capital requirements, and
enhancing transparency standards and investor information the
Minister says:
"It is very disappointing that in the context
of these three proposals for future harmonisation, the Commission
has failed to outline the importance of ensuring the independent
nature of the depositary from the fund manager. This is a priority
for the Government. Unlike most other EU Member States, UK depositaries
must be independent from the fund manager. We see this as a critical
component to safeguard investor interests; enhance transparency;
converge operating conditions and clarify the extent of the depositaries'
liability. All the other issues outlined under these priorities
are ancillary to this key component of a single market for depositaries
when coupled with passporting arrangements."
Conclusion
7.12 The relationship between UCITS fund managers
and depositaries is important both in terms of protection of investors'
legitimate interests and of the single market. We note the Government's
concerns about the quality of this document, both as regards its
analysis and the possible further harmonisation it suggests.
We will examine the Commission's final report carefully in relation
to these issues.
7.13 Meanwhile we clear this document.
23 Directive 85/611/EEC as amended by Directives 2001/107/EC
and 2001/108/EC. Back
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